This article is sponsored by PwC.
Corporate Environmental, Social, and Governance (ESG) reporting is evolving rapidly, propelled by proposed or enacted regulations in the European Union, the United States, and globally by the International Sustainability Standards Board (ISSB). While these regulations have the potential to affect companies worldwide, perhaps the most immediate concern is the EU’s Corporate Sustainability Reporting Directive (CSRD), which took effect in January. The directive expands the reporting requirements for ESG information and is aimed at driving change in the business behavior of companies that operate in the EU, which includes U.S. companies with EU subsidiaries that meet certain criteria. To successfully navigate the complexities of the CSRD, here is what your company must know to take action now and avoid scrambling to comply.
Who needs to comply with CSRD?
Your company needs to consider how the CSRD applies at multiple organizational levels to ensure all reporting obligations are identified. The directive will generally apply to three types of companies:
- Companies with securities listed on an EU-regulated market: This includes both EU and non-EU entities with listed debt or equity securities, with limited exceptions.
- "Large" EU companies that are not listed: "Large" ompanies are defined as those exceeding certain asset, revenue and workforce size thresholds in two consecutive years. If an EU subsidiary of a U.S. company exceeds those thresholds, reporting would be required.
- EU companies that are part of a "large group" and not listed: This category encompasses EU entities, including EU subsidiaries of U.S. companies, that are parents of a group that exceeds certain asset, revenue and workforce size thresholds in two consecutive years.
In addition to reporting based on the above criteria, consolidated sustainability reporting will be required for non-EU headquartered companies at a global level if a company generates a certain amount of revenue in the EU and has at least one EU subsidiary or branch that meets the criteria. The directive outlines exemptions that depend on how your company consolidates its sustainability reporting.
What will your company need to disclose for CSRD requirements?
The CSRD will require comprehensive and granular disclosures covering the entire spectrum of sustainability topics. These disclosure requirements are detailed in 12 new European Sustainability Reporting Standards (ESRS) that have been adopted by the European Financial Reporting Advisory Group (EFRAG). The standards span ESG topics and are intended to provide insight into a company’s sustainability impacts, risks and opportunities, including:
- Sustainability strategy
- Targets and progress
- Products and services
- Business relationships
- Incentive programs.
The information reported may not be limited to a company’s own operations but would extend to direct and indirect business relationships across the value chain. These disclosures are expected to be some of the most challenging areas of reporting, given the scope and the reliance on information from parties that the company does not control.
The CSRD also embraces "double materiality," which requires that companies report information necessary to understand how sustainability matters affect their business development and performance and the impact they have on a range of sustainability matters. In addition, the directive introduces a mandatory assurance obligation for all reported sustainability information. (That stands in contrast to the assurance requirement outlined in the U.S. Securities and Exchange Commission’s proposed climate disclosure rule.) While the chief financial officer and the chief sustainability officer will play leading roles in sustainability reporting, given CSRD’s complexity, we recommend companies also include their legal counsel in their reporting process.
How will CSRD requirements impact your sustainability reporting strategy?
EU Member States have until early July 2024 to incorporate the CSRD’s provisions into national law. Member States cannot reduce the requirements during this process, but they can add additional provisions. It will be critical that companies operating across Europe stay aware of developments in the jurisdictions in which they operate. Required reporting for some companies will begin as early as fiscal year 2024 so it’s imperative that your company begin preparing to meet reporting obligations. Evaluating scope, the applicable effective dates, alternatives for reporting at different levels within the organization (if any) and what compliance with the disclosure requirements will entail (including which sustainability matters are material and consideration of the EU taxonomy) will set the stage for successful implementation.
It’s crucial to create an implementation plan. Your company’s plan should include understanding the wide-ranging disclosure requirements, as well as the expected effort to obtain information and develop and implement reporting systems. In addition, this understanding may offer insights that assist in determining the level of reporting preparation when it affects multiple entities within the organization.